HMRC reclaimed £34m in Lifetime ISA (LISA) withdrawal charges in the 2020/21 tax year, a more than threefold increase over the previous year according to a freedom of information request by Hargreaves Lansdown.
Withdrawal fees have risen despite the government lowering the LISA withdrawal charge from 25 per cent to 20 per cent between March 6 and April 5, 2021. The fee was reduced by the government to allow people to access their money during the pandemic while only losing the government bonus.
LISAs allow individuals to contribute up to £4,000 per tax year and the government will add £1,000 to the LISA, bringing the total to £5,000. If someone withdraws from their LISA for a reason other than retirement or home purchase, they will be charged a 25 per cent penalty which is more than the government’s top-up.
Hargreaves Lansdown launched a petition to keep the 20 per cent charge in place.
Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey says: “The pandemic wrought a huge financial toll on young people, and this can be shown in how they raided their LISAs to fill gaps in their finances. Withdrawal charges spiralled in the last tax year and now stand at an eye-watering £34m – a more than threefold increase. This is money earmarked for home purchases and retirement and the decision to access these savings and lose the government bonus will not have been taken lightly.
“The government’s decision to cut the withdrawal charge from 25 per cent to 20 per cent for a year may be one factor behind the huge surge. Previously the 25 per cent charge on withdrawals would have not only recouped the government’s bonus but taken a chunk out of the holder’s savings too – at a time when money is short, this may be a cost too much to bear. It may also be the case that the financial pressures of the pandemic have forced people to take action regardless of the cost.
“The decision to cut the withdrawal charge was only active for a year and the pandemic has of course dragged on for much longer than this. This tax year, any LISA holder will have to contend with a 25 per cent charge on any withdrawals. We can expect to see another enormous increase in the amount recouped by HMRC for the 2021/22 tax year.
“Life has its ups and downs and at times people need to dip into their savings to cover shortfalls in their income. We believe the 25 per cent withdrawal charge is unfair and penalises savings. We would urge the government to reassess its decision to reinstate the 25 per cent withdrawal charge in favour of keeping it at 20 per cent.”